Montreal Trust Corp.is facing reduced earnings.Its entire industry has been facing declining demand due to a severe recession; however its stock price has suffered more than the stock price of its competitors.The market believes that it is fundamentally weaker than its competitors.Montreal Trust's CEO has decided to prop up the stock price by increasing its dividend.He believes that,according to the dividend discount model (DDM),if Montreal Trust increases its dividend,then its stock price will rise.Why won't this work?

Question

Quizplus · Accepted Answer

The Answer of Montreal Trust Corp.is facing reduced earnings.Its entire industry has been facing declining demand due to a severe recession; however its stock price has suffered more than the stock price of its competitors.The market believes that it is fundamentally weaker than its competitors.Montreal Trust's CEO has decided to prop up the stock price by increasing its dividend.He believes that,according to the dividend discount model (DDM),if Montreal Trust increases its dividend,then its stock price will rise.Why won't this work?